RBI raises intervention bond ceiling

The Reserve Bank of India RBI today raised the cap on bond sale under the market stabilisation scheme MSS to Rs 1,50,000 crore in a bid to absorb liquidity generated through its intervention in the forex market. The cap was earlier Rs 1,10,000 crore. The move comes soon after finance minister P Chidambaram said that 8220;we will review the cap if necessary8221;. 8220;The threshold at which the ceiling will be reviewed in future will now be Rs 1,35,000 crore,8221; the RBI said.

The Reserve Bank reviewed the MSS cap because it has sold bonds totalling Rs 98,970 crore till today. The limit at which it was to review the cap was Rs 95,000 crore. The ceiling had earlier been revised to Rs 1,10,000 crore from Rs 78,000 crore. The hike in the cap had become necessary as the rupee is hovering at a nine-year high against the dollar.

The RBI has purchased dollars to rein in the rupee, which has risen nearly 9 per cent against the dollar since 2007 start. This intervention releases rupees into the money market, triggering inflationary pressures. To sterilise this, RBI resumed bonds sale under MSS from March. On Tuesday, the government had put restrictions on external commercial borrowings ECB to check the rise in rupee value. The government disallowed companies raising more than 20 million of ECB to remit the funds into India. Besides this, those raising up to 20 million of ECB will have to seek RBI permission to remit such funds in India.